标题: Interest rate (discount factor) in Derivative [打印本页] 作者: malbec 时间: 2011-7-11 19:52 标题: Interest rate (discount factor) in Derivative
Hi, I am confused between how to use correct method to get Present Value of a number.
As you see as below, there are two methods to calculate the PV discount factor.
Do you know what is the difference?
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RFR= Risk Free Rate
For example, T=20 days ; Annual RFR Rate=5% or 0.05
1) 1 + 0.05 (20/360) = 1.002778 <--- This is used to calculate PV factor of swap
2) 1.05 ^ (20/360) =1.002714 <--- Put Call Parity: eg: C + X/(1 + RFR)^T = P + S
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Edited 1 time(s). Last edit at Friday, May 13, 2011 at 09:49AM by shinki.作者: chandsingh 时间: 2011-7-11 19:52
Your #1 is simple interest (a discrete, day-by-day measurement), and your #2 is compound interest (althought I would guess you'd use 365 as the demoninator, unless it's a t-bill).
Honestly, sometimes you just have to know which to use in a given situation. I would hope if it's not defined by a formula (like for bonds and t-bills), you are told simple, compound, or continuous.作者: firat 时间: 2011-7-11 19:52
Many thanks for your explanation!!!作者: comp_sci_kid 时间: 2011-7-11 19:52
I'm pretty sure we're almost always using compound interest unless we're specifically talking about the LIBOR, which our plain vanilla swaps are based on (hence using the simple interest)
